The Q Word

March 29, 2013

Comments and Advice to Help Improve the Tax Returns That We Prepare

There are so many things to remember. Keeping track of all that information is like gathering

FEATHERS IN A WIND TUNNEL

No one thing about VITA tax preparation is really that difficult. Its just that there are so many little things and many probably werent covered in training. Here are a few. Entering Unreported Tip Income Chuck worked at a parking garage in downtown Chicago. He had a W-2 reporting only his wages. When we asked him if he had any tip income, he said that his employer didnt want employees reporting tips to him. Then he pulled out a ragged spiral notebook where he had recorded $3,500 in tips. (It could happen!) Hours later or so it seemed - after researching various publications, calling life lines, looking at TaxWise help, and some hair pulling, we discovered how to enter the tips. Link from Form 1040, line 7, to Form 4137, Social Security and Medicare Tax on Unreported Tip Income. Use F8 or control-enter to override the entries for line 1, columns (a), (b), and (c): employer name, EIN, and tip amount. (Yes, override!) Enter unreported tip income on line 4. If the employee had less than $20 tips in any month, that amount is entered on line 5. These tips are not subject to social security and Medicare taxes. TaxWise will prepare the rest of the Form 4137, include the income on Form 1040, line 7, compute social security and Medicare tax on the tips, and enter that tax on line 57, Form 1040. Child Care Provider Identification Number Ellen Mae is a single mom with two kids and she was really in a hurry to get her tax refund. She had paid for day care while she went to work. She knew how much she paid, but she forgot to bring the child care providers identification number. She called and texted the provider, rifled through her purse, and called home to see if someone could find her copy of last years return. But she did not find the providers number. She asked if she could file now and come back in April to file an amended return to claim the child care credit and get the rest of her refund. There was much discussion about site waiting times, how 1040X processing takes a long time, and the like.

The Q Word Center for Economic Progress

March 29, 2013

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Finally, Ellen Mae asked the preparer, How much will I lose if I just dont claim the child care credit at all? The preparer deleted the Form 2441 and the refund amount didnt change! Ellen Maes standard deduction and exemptions were more than her income. She did not benefit from the child care credit and didnt need the providers number after all.

Whenever dealing with issues around the child care credit or other nonrefundable credits always look at Form 1040, page 2, line 43, taxable income. If this line is zero and often it is then the client wont benefit from the credit and there is no need to pursue the issue. Note that the guideline here is that taxable income is zero not net income tax. Due to the interplay between the various credits, zero net income tax does not always mean that no benefit could be realized by claiming the child tax credit. Married Filing Separately When a married person wants to file separately, pursue the possibility of a better option. If the client has kids that live with him/her and the client did not live with the spouse during the last 6 months of the tax year, consider if the client qualifies to use head of household filing status. The client may want to file separately to avoid offset of the refund to a balance due. If only one spouse has a balance due, suggest filing a joint return claiming injured spouse, Form 8379. If neither head of household nor injured spouse seems to apply, explain the effects of filing separately (no EITC, no education credits, etc.), then leave it alone. Every married person can choose joint or separate and sometimes there are personal reasons for making the choice. As tax preparers, we should provide the relevant information and then butt out. How might one of these conversations go? Heres an example. The intake information shows that Frances is married, has no kids, earned $2,000, and lived with her husband all year. She has a Form 1098-T and it appears that she qualifies for the American opportunity credit. Fran: Im married, but I dont want to file with my husband, Johnny. Prep: I want to let you know that filing separately is not a good filing status for most taxpayers. Fran: What do you mean? Prep: There are several tax benefits that are not allowed to a married person filing separately. In your case, it would mean no earned income tax credit and no education credit. Fran: Thats all right. I wouldnt get it anyway. Prep: What do you mean? Fran: Johnny is behind on his child support payments. If I file with him, theyll take the refund. Prep: Thats true; they can take the refund to apply against the child support debt. But there is a way that you can file a joint return and protect part of the refund. Its called injured spouse. You would get your part of the refund and his part would go toward the child support. I cant say for sure because I havent seen Johnnys information, but I predict that you would be better off filing a joint return claiming injured spouse. Fran: OK. How do we do that?
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Prep: Fran: Prep:

Has he already filed for 2012? No. Hes in no hurry since he wont get a refund. I suggest that you come back together, bring all the tax information for both of you, and well prepare a joint return claiming injured spouse.

Claiming Newborns When a child is born during the tax year and the child lived with the taxpayer from birth through the end of the tax year, that child is considered to have lived with the taxpayer the entire tax year. Analysis of IRS data by professors at the University of Chicago Harris School revealed that taxpayers are less likely to claim a child who was born late in the tax year. Lets not make that mistake! Jackie has one child, a baby who has lived with Jackie since he was born on Thanksgiving Day, 2012. Jackies income was $12,000 wages with no withholding. Jackie wrote 1 for number of months lived in your home in 2012 on Form 13614-C. The preparer, entering what he saw on the Form 13614-C, entered 1 for months in home on the Main Information Sheet. This resulted in a $150 refund, all from EITC. Because the child is considered to have lived with Jackie all year, the preparer should have entered 12 on the Main Information Sheet for the number of months that the baby lived with Jackie. When this change was made, Jackie got a $4,169 refund: $3,169 EITC and $1,000 additional child tax credit. Caution: Preparers often enter whatever the client has written on the Form 13614-C. Remember, the Form 13614-C does not ask clients to tell us their filing status or who they are claiming. It asks for marital status and who lived where. Its up to preparers to take this information and correctly apply the tax law and prepare a correct return. That Crazy Red Box on Form 8863 Yes, there are lots of wacky things on Form 8863 this year, but this one continues to be the most befuddling to me. Im referring to the box on line 7, relating to the refundable part of the American opportunity credit, that lights up red when the taxpayer is under age 24. The 2012 Form 8863 instructions (http://www.irs.gov/pub/irs-pdf/i8863.pdf) include a new series of questions that act like a flow chart to help preparers know whether to check the box. Look at the bottom of page 4 of the instructions to find these questions that can make it easier to determine if a taxpayer qualifies for the refundable part of the credit.

The Q Word is written to provide commentary, information, opinions and observations from a grass roots perspective to all Preps, managers, and coordinators that are involved in free income tax preparation programs. If you have any suggestions for the Q Word, or would just like to submit comments, questions, praise, or bitter criticism, please e-mail: Barbara DelBene at bdelbene@economicprogress.org The Q Word Center for Economic Progress March 29, 2013

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